I make no secret of the fact that I think fears over a depressed property market are throwing up some bargains, but I’m not talking about buy-to-let. That craze is subsiding these days, and it’s looking far too risky to me.
No, the bargains I’m seeing are in housebuilders and real estate investment trusts (REITs).
UK income
RDI Reit (LSE: RDI), formerly known as Redefine International, gave us a first-half report Thursday headlined “Strong operational metrics despite headwinds.”
The company, which seeks income and is focused on the UK industrial and retail sectors, reported a 3.6% decline in underlying earnings at £26.4m, with underlying EPS down 5.2% to 6.94p. I think that’s pretty reasonable in the current economic climate.
Net rental income actually rose, by 0.2% on a like-for-like basis. But if £0.7m of hotel refurbishment costs are taken out, that rises to 1.9%. Occupancy rates were strong, declining only slightly from 92.1% at 3 August to 96.9% by 28 February.
Dividend
The interim dividend was cut from 6.75p per share to 4p, with the company saying full-year dividends are to be weighted towards the second half “with expectation to revert to regular payout ratio alongside full-year results.” Last year provided a full-year yield of 8%, and I think even half that would be reasonable in today’s conditions.
All that sounds good enough, but it’s the balance sheet that attracts me the most. RDI reported a net asset value (NAV) per share of 204.4p, down 4.4% from 213.8p a year previously, but how does it stack up against the share price?
At 129p as I write, the shares are trading on a discount to NAV of 37%. I’d probably expect a double-digit discount for a REIT these days, but that sounds like an undervaluation to me.
Venerable
I’m turning now to FTSE 100 stalwart British Land Company (LSE: BLND), which splits its investments between prime London office space and UK retail and leisure property. The firm’s annual rental income of about £580m is part of the reason my Motley Fool colleague Roland Head chose British Land for his ISA, and with the resulting reliable dividends yielding 5% and better, I find it hard to disagree with him.
British Land shares are trading on a similar discount to NAV as RDI shares, and again, I see that as indicating undervaluation. The company seems to think so too, having completed a £200m share buy-back programme in March.
Results
Full-year results are due on 15 May, and commenting on first-half performance last November, chief executive Chris Grigg said: “Our London office developments are letting up ahead of schedule and on better terms than expected.” He added that “demand for the highest quality London office space is expected to continue,” though there could well be some Brexit uncertainty.
I’m very much aware of the pressures on the retail world from the growth of online selling, but the whole of the commercial property sector looks like it’s in times of maximum pessimism at the moment — and I reckon that’s the time to buy.
I see both of these REITs as providing attractive long-term income that could be locked in now at low share valuations, with a prospect of capital growth as a bonus.